Guidance for specific paragraphs of the code

Managers should have a monitoring process in place to identify whether the contributions that fall to be paid under the direct payment arrangements are paid in full and on time.

It is for the managers to decide what process to put in place. However, it should be fit for the purpose of identifying payment failures so that the managers can fulfil their legal duty to report material payment failures to the regulator and to members. Ideally the process and policies that the managers will adopt for monitoring will be documented in writing.

The process used need not require the checking of every contribution received. It may be a risk-based process, allowing the managers to identify situations which present a higher risk of material payment failures occurring that require the managers’ intervention. The process needs to enable the managers to comply with their reporting duties, but the regulator recognises that it must be commercially viable for the managers and proportionate so that it is in the interests of the scheme membership as a whole.

To be able to identify payment failures the process should be capable of checking more than the fact and timing of a contribution. Where a higher risk situation occurs, the managers’ processes should enable them to check the accuracy of the contribution due. This could involve checking the calculation of a contribution which is expressed as a percentage of pensionable pay under the direct payment arrangements.

To assist managers in establishing a risk-based process, the regulator believes the type of situation or characteristic that may indicate higher risk includes:

employers who have demonstrated a past history of errors or repeated late or underpayment of contributions

employers who use manual payroll processes or a payroll provider that has supplied inaccurate pension contributions or pensionable pay data in the past

employers who provide manual payment information to the managers, or who have not provided accurate and timely payment information in the past, and

unexpected fluctuations in the level of contribution where the managers would normally expect contribution levels to be consistent, for example where the managers have not previously seen fluctuating contributions from the employer and contributions received suddenly drop without warning. If the managers are used to seeing fluctuating contributions across pay periods (for example because they are aware that workers have fluctuating levels of pensionable pay) regular changes to contributions may not give themanagers any cause for concern.

Where a higher risk situation is identified managers should carry out checks to ascertain whether contributions are being paid in accordance with the direct payment arrangements. The type of checking required will depend on the risk identified and the circumstances of the case but appropriate checks may range from random contribution sampling to a full audit of contributions.

For example, an employer has provided late, manual, payment information to the managers multiple times in a year. The managers undertake an initial sampling of contributions to establish whether payment failures have occurred and this indicates the likelihood of systemic failure. The managers therefore decide to carry out a full analysis of all contributions received in order to be able to understand the extent of the problem before being able to seek to resolve the payment issues.

Where only lower risk situations are identified, the managers may simply decide to carry out occasional spot checks of the contributions received from employers. This will allow them, for example, to satisfy themselves that the basis on which contributions are being paid aligns with the direct payment arrangements. It will also help to assure the managers that they have set their risk indicators correctly and that their risk-based monitoring process is working effectively.

There is no need for managers to systematically duplicate the contribution calculation process undertaken by the employer’s payroll system. However, they should carry out periodic checks across employers to ensure that the percentages used by payroll in the calculation of contributions are consistent with those set out in the direct payment arrangement. This will help managers ensure that their control framework is working and their monitoring processes are able to spot where obvious anomalies exist in the pensionable pay information provided by the employer.

The regulator accepts that a monitoring process based on information provided by the employer may not be able to confirm deliberate underpayment or non-payment, or fraudulent behaviour by the employer (as the employer may try to manipulate payment information to disguise their actions). But it should be able to detect situations where fraud may be more likely to occur and where additional checks may be appropriate.

To be able to monitor contributions, the managers may from time to time require payment information from the employer including pensionable pay details where contributions are expressed as a percentage of pay. How this is provided by the employer should be established at the set up of the scheme. Where payment information is not provided regularly by the employer and it is necessary to carry out risk-based monitoring, the managers should request it from the employer. If the employer refuses to provide it, the managers may report this to the regulator. The managers may accept the payment information provided by the employer at face value unless they have reason to believe it to be incorrect.

The managers are not expected to carry out detailed examinations of pay data, such as to examine whether the elements of pay which are pensionable under the scheme rules are actually being taken into account in the calculation of contributions. However, the managers’ processes should be able to identify when clear errors or omissions arise, for example, if payments were to suddenly fall by a certain percentage or more from period to period.

A suitable monitoring process should be established for all schemes regardless of whether the scheme is being used by an employer for automatic enrolment purposes after their staging date.

The regulator recognises that older legacy schemes may not currently have a suitable process in place and it may take time for managers to establish one. When considering a risk-based process for this type of arrangement the recent history of payment failures by employers using the legacy schemes may be a factor to be taken into account.

Where there is a payment failure, the regulator considers that managers should attempt to contact the employer to resolve the overdue contributions. The regulator considers that managers should make at least three attempts to contact the employer within 90 days of the due date having passed without full payment of the contribution. Managers should, in making contact, alert the employer to the failure, request payment of any outstanding amounts and seek an explanation of the cause and circumstances of the payment failure.

The regulator believes that telephone contact is the best method for encouraging employers to comply and therefore recommends that at least one of the three contact attempts should be by phone. However, it is for the managers to decide the most effective way to resolve payment failures and how contact should be made, taking into account their own circumstances as well as those of their employers. The regulator acknowledges that telephone contact is not practicable for all schemes or in all circumstances.

Managers should record the communication attempts made to contact the employer and to record the cause and circumstances of the payment failure where this can be established. Recording this information will help to evidence effective monitoring by the managers.